Creating wealth

Today, I am going to share money management tips that you can use to control your finances and create wealth.

If you use these simple tips, you will immediately see an improvement in your financial well-being. Those first few wins will make you feel good and set you up for even greater wins.

Unfortunately, even though the advice is simple, most people don’t use it.

Wealth is not created by chance. It is created through habits and discipline.

I call the framework that we are going to look at “Fiscal Prudence”.

The benefits of Fiscal Prudence are:

• It is easy to implement.

• Anyone, at any stage of their career can use it.

• The results are immediate.

Here’s the step-by-step guide to get you going:

Step 1: Save first, spend later

This is by far the most important step and the one most people get wrong. Most people get a salary and then spend it as needed. When that is done, they look at what is left over and try to save.

The problem is that there are always things to spend on, which leaves little for savings. However, if you save first, your expenses will automatically adjust to what is left over. You will never be short. And if there is an emergency, you will have the savings to cope with it.

Implementation tactics:

1. Build up a savings account to cover 3-6 months of living expenses.

2. After the savings are in place, speak to a financial advisor and invest in mutual funds, unit trusts, passive funds, exchange traded funds, pensions, etc. Put these on automatic - set up bank debit orders to invest every month.

3. If you are not a professional, beware of dabbling in the stock market. It is a hard game to win, but an easy game to lose.

4. Pay a financial advisor a consultation fee to advise you. Let them help you to implement financial goals. Beware of a no-charge consultation because the fee will be in the financial products. You do not want the advisor pushing you toward high sales commission products. You just want good advice.

Step 2: Budget

For me budgeting is not about counting every penny. I budget by going through bank statements and capturing expenses on a spreadsheet. It takes about an hour every month.

The value of capturing expenses (or categories of expenses) is that you know your exact financial situation at all times. From there it is easy to know what future expenses will look like.

Step 3: Buy the car you can easily afford

Cars are cool but they are not the best assets. They lose value very quickly. In the early stages of building wealth, you do not want to handicap yourself with expensive cars.

So when you choose a car, pick something that meets your needs. But do not pick a car based on your maximum affordability.

Here’s a trick to overcome car temptation. Google the previous model of the car that you want to buy. It will probably be 5 to 7 years old. It will be significantly devalued. It will look outdated, the interior will have shiny worn seats and a worn steering wheel. The technology will be ancient. That is exactly what the car you want to buy now will look like in 5 years time. So don’t waste your money while you are building wealth.

Step 4: Buy the house you need, not the one you desire

Home purchases are very emotional decisions. But beware of overspending. A seven bedroom home is nice, but do you really it to start out?

Bigger always requires more maintenance, more insurance, more security, more cleaning, more time and more money.

When you are starting out, just buy what you need. You can always trade up as you build wealth and earn more.

Step 5: Don’t use credit for consumption

Consumption means things you will use immediately. That includes food, clothes, holidays, entertainment, mobile phones, etc.

Using credit cards to buy this stuff is very expensive if you incur interest. The solution is to pay the credit card in full every month.

Some banks also allow you to spend directly from your home loan. The interest rate is lower than a credit card, but this is an even more crazy way to buy things. You could end up financing a loaf of bread over 30 years.

If you want to buy something and you cannot afford it. Save up for a few months and then buy it. Don’t use credit for consumption.

You can think of using credit as borrowing from your future. The more you borrow now, the less you will have in future after repayments. You may have to borrow to purchase a car and a home, but don’t borrow to consume.

Step 6: Look after your health

This may not sound like a financial tip, but it is.

The bill from a week or two in hospital can undo years of wealth building.

You can avoid a lot of lifestyle diseases by living a little healthier right now. Think about eating more fresh foods and doing some light exercise. Start small.

Conclusion

Use these simple steps to take control of your finances. From there you can build wealth with new habits.

The best way to implement new habits is to make small, easy changes. Build up that savings account steadily and watch how good it makes you feel. For your health, eat a fruit and start walking daily. As you experience the benefits, you will naturally do more.

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